Market comment 2022

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The volatility on Wall Street continued on Wednesday, this time to the downside. U.S. stocks closed in the red, eating into the prior two days' gains. While the small-cap Russell 2000 index declined the most — down 1.7% — it has outperformed the major indices recently. This performance has caught the attention of Wall Street, which is laser-focused on the impacts of the strengthening U.S. dollar and surging Treasury yields. Both of those factors likely led to Wednesday's decline in U.S. stocks. Small-cap companies — which generally have market capitalizations of less than $2 billion — tend to be less affected by currency fluctuations than larger cap companies. The stronger dollar is less likely to take a toll on these companies, as smaller caps are more likely to do business in the U.S. rather than overseas. 

While the Russell 2000 index sold off sharply from mid-August to early October with the other averages, it didn't break down through its June low, while the so-called major averages did. The Russell bottomed on Sept. 26 — putting in its most recent low — days ahead of the Dow and two weeks ahead of the lagging Nasdaq. This relative outperformance by small caps is catching the attention of Wall Street because, as Liz Young, head of investment strategy at SoFi, pointed out in a tweet, "small-caps have outperformed large-caps coming out of recessions 6 out of the last 6 times (all that we have data for)."

Why Wall Street is warming up to small cap stocks: Morning Brief